CAF ENERGIZER- DAY 1

CAF 2: TAX PRACTICES

COMPILED BY: MURTAZA QUAID,ACA
 Compiled by: Murtaza Quaid, ACA

PRACTICE QUESTIONS – TAXATION OF INDIVIDUALS

Question 1. [CA Final Exam]
Mr. Saif is a country manager in Rio (Pvt.) Limited (RPL), a company engaged in the business of
manufacturing and supply of beauty products. During tax year 20X3, RPL paid him a monthly basic salary
of Rs. 600,000. He is also entitled to a bonus of Rs. 900,000 to be paid in July 20X3.
In addition to above, Mr. Saif was also provided the following:
(i) A company maintained car for both his personal and official use. The car was obtained on lease in
20X1 at total rentals of Rs. 2,000,000 to be paid over the lease term. The fair market value of the
car at the commencement of lease was Rs. 1,500,000. RPL also paid Rs. 100,000 for its maintenance
to a local workshop.
(ii) A fully furnished two storey bungalow in a posh locality. The annual rental value of the bungalow
was Rs. 2,400,000.
On 1 January 20X3, Mr. Saif let out the first floor of the bungalow to his brother Mr. Moiz at a
monthly rent of Rs. 75,000 and also insured it against the risk of fire. The premium payable to the
insurance company amounted to Rs. 50,000. Mr. Saif paid 50% of the premium immediately and
agreed to pay the balance on 1 July 20X3. He also bought an LCD TV for Rs. 70,000 for the first
floor.
(iii) Reimbursement of Rs. 120,000 against air tickets for family vacation. Total cost of tickets was Rs.
200,000.
(iv) On 1 January 20X3, RPL sold certain items of old stock to Mr. Saif for Rs. 5,000. The net realizable
value of the stock in RPL’s books as on 30 June 20X2 and 31 December 20X2 were Rs. 12,000 and
Rs. 14,000 respectively. The original cost of the stock was Rs. 25,000.
(v) Withholding tax deducted by RPL from Saif’s salary amounted to Rs. 210,000.

Following further information is also available:

(i) On 1 July 20X2, he borrowed Rs. 3,000,000 from a bank at 11% mark-up. The amount is payable in
two equal annual instalments starting from 1 July 20X3. Out of the above loan, Mr. Saif utilized Rs.
2,550,000 for the acquisition of a plot of land in an industrial area and Rs. 450,000 for the purchase
of a car for his son. On 1 September, 20X2 he let out the plot of land to Mr. Amir at a monthly rent
of Rs. 25,000. He also received an un-adjustable deposit of Rs. 150,000 and paid Rs. 10,000 for
levelling and cutting of grass, Rs. 15,000 against ground rent and Rs. 18,000 for rent collection.
(ii) On 1 May 20X3 he sold 1,200 shares in Mio Limited at Rs. 50 per share. Mio Limited is an unlisted
company in which 55% of the shares are held by Chinese Government. Mr. Saif had acquired these
shares for Rs. 42,000 on 30 June 20X1.
(iii) In August 20X2, Mr. Saif started a fitness club for corporate executives. The admission and monthly
membership fees for the potential members were fixed at Rs. 25,000 and Rs. 5,000 respectively. A

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group of 20 persons joined the club in August 20X2 whereas 25 persons joined in January 20X3 and
30 in March 20X3.
Following items were included in club’s profit and loss account for the tax year 20X3:

 Monthly salary of Rs. 60,000 to Mr. Saif and Rs. 45,000 to his son by way of a direct transfer of
funds to their bank accounts. His son is a trainer at the club.
 Rs. 2,750,000 against import of old fitness machines from China.
 Fine of Rs. 15,000 which was paid when the truck delivering the fitness machines from the port
to the club was found to be overloaded.
 A fire occurred in a section of the club and repairs had to be undertaken as follows:
- Cost of replacing electrical wiring damaged by fire Rs. 85,000
- Cost of a new non-removable fire protection screen installed to prevent fire in future Rs.
200,000.
 Other miscellaneous expenses amounting to Rs. 120,000.
(iv) On 15 June 20X3, Mr. Saif donated a plot of land to Pakistan Sports Board. He had purchased this
plot in tax year 20X1 at a price of Rs. 300,000. However, at the time of donation, a broker had
given him an offer of Rs. 500,000 for the said plot.

Required:

Under the provisions of Income Tax Ordinance, 2001 and Rules made there under, compute the taxable
income and income tax payable by or refundable to Mr. Saif for the tax year 20X3.
Note: Show all relevant exemptions, exclusions and disallowances.

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Question 2. [CAF 6 Past Paper, Spring 2021, Q3, 19 marks]

Muhammad Asghar owns an industrial undertaking under the name and style of Asghar & Company (AC)
which is engaged in the business of manufacturing pharmaceutical products. Following information is
available for the year ended 31 December 20X1:

Additional information:
(i) Cost of goods sold includes:

 raw materials of Rs. 7,800,000. No withholding tax was deducted at the time of payment.
 accounting depreciation of Rs. 2,100,000 on plant and machinery.

 provision for slow moving inventory of Rs. 1,800,000.

(ii) Administrative and distribution expenses include:

 Rs. 676,500 paid to a local hotel for holding annual Eid-Milan party for the employees and
their families.
 Rs. 1,235,000 paid as penalty to a customer in settlement of his claim for damages under a
contract for the supply of a batch of vaccines. Laboratory tests and in-house investigations
revealed that the level of impurities in the vaccines exceeded the acceptable level as agreed
in the contract.
 Rs. 2,300,000 paid as donation to a hospital established by the local government.

(iii) Marketing expenses include a reward of Rs 500,000. The reward was paid in cash to one of the
salesmen for exceeding his sales target.

(iv) Other income includes:

 dividend of Rs. 174,000. This amount was received from a listed company after deduction of
income tax at the rate of 15% and Zakat of Rs. 30,000 deducted under the Zakat and Usher
Ordinance, 1980.

 gain of Rs. 660,000 on sale of shares in Akash (Pvt) Limited (APL) in November 20X1. 60% of
the shares in APL are owned by the Federal Government. AC purchased these shares in June
20X0.

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Other information:

(i) A second-hand plant was imported from France at a cost of Rs. 2,500,000. Withholding tax of Rs.
150,000 was deducted at import stage. The plant was installed in the month of September 20X1.
AC incurred Rs. 375,000 on the installation of plant which is included in administrative and
distribution expenses.

(ii) Pre-commencement expenditures of Rs. 3,400,000 were charged to accounting profit and loss
for the year ended 31 December 20X0. However, for tax purposes, it has to be amortized over
the period of five years.

(iii) Tax depreciation other than imported plant amounted to Rs. 1,900,000.

(iv) Income tax deducted by the customers u/s 153 and advance income tax paid u/s 147 during the
year amounted to Rs. 1,400,000 and Rs. 200,000 respectively.
Required: Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder,
compute total income, taxable income and net income tax payable by or refundable to AC for the tax
year 20X2.
 Your computation should commence with profit before tax figure of Rs. 2,468K.
 Ignore minimum tax under section 113.
 Show all relevant exemptions, exclusions and disallowances.

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Question 3. [CAF 6 Past Paper, Autumn 2020, Q1, 19 marks]

Sageer, a resident individual, is working as a full time professor at Knowledge Institute (KI) which is a
non-profit education and research institution and is duly recognized by Higher Education Commission. KI
is entirely owned and funded by Zinger Limited (ZL), a company listed on the Pakistan Stock Exchange.

Details of his monthly remuneration during the year ended 30 June 20X3 are given below:

In addition to the above, he was also provided the following:

 Health insurance for Sageer and his dependents as per the terms of employment. For this purpose,
KI is paying annual insurance premium of Rs. 40,000.

 Provident fund contribution of Rs. 15,000 per month to a recognized provident fund. An equal
amount was also contributed by Sageer to the fund.
Additional information
(i) On 1 July 20X2, Sageer was granted an option to acquire 10,000 shares in ZL at a price of Rs. 105
per share under an employee share scheme. Sageer bought the option on the same date by
paying Rs. 175,000 to KI when the fair market value of the option was Rs. 200,000. He exercised
the option on 30 September 20X2 when the fair market value was Rs. 130 per share.

As per the scheme, he was not allowed to sell or transfer the shares before 31 December 20X2.
On 31 December 20X2, the fair market value of ZL’s shares was Rs. 142. On 30 May 20X3, he
sold 5,000 of these shares at Rs. 135 per share.
(ii) On 1 July 20X2, Sageer obtained an interest free loan of Rs. 1,500,000 from KI in exchange for
which he agreed to waive the interest receivable on his provident fund balance maintained with
KI. Interest provided on provident fund balance for the year was 8%. The prescribed benchmark
rate is 10%.

(iii) On 31 August 20X2, he received leave encashment of Rs. 100,000 relating to previous year.

(iv) During the year, tax of Rs. 160,000 was deducted at source by KI.

Other information relevant to tax year 20X3:

(i) On 15 January 20X3, he sold a shop situated in Karachi for Rs. 15,000,000. He had purchased this
shop in 20X1 for Rs. 19,000,000 out of which Rs. 5,000,000 was paid in cash.
(ii) On 1 March 20X3, he sold a residential plot situated in Faisalabad for Rs. 18,000,000. The plot
was inherited from his father in 20X1. Fair market value of the plot at the time of inheritance
was Rs. 7,000,000. His father had purchased the plot for Rs. 12,000,000 on 31 August 20X1.

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(iii) In June 20X3, Sageer independently developed learning courses for sale through a web based
marketplace managed by a company situated outside Pakistan. On 25 June 20X3, he received
USD 4,260 into his dollar account from sale of these courses. Withholding income tax @ 8% was
deducted from the receipt as per the income tax laws of the foreign country.

Relevant exchange rates were as follows:

25 June 20X3 USD 1 = PKR 168

30 June 20X3 USD 1 = PKR 169
Average exchange rate for June 20X3 USD 1 = PKR 168.5
(iv) On 1 June 20X3, Sageer paid Rs. 2,500,000 as donation to a non-profit organization listed in the
thirteen Schedule of the Income Tax Ordinance, 2001.

Required: Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder,
compute the taxable income and net tax payable by or refundable to Sageer for the year ended 30 June
20X3. Show all relevant exemptions, exclusions and disallowances.

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Question 4. [CAF 6 Past Paper, Autumn 2020, Q4(a), 7 marks]

Farheen is a resident filer and has provided following information pertaining to tax year 20X3:

(i) She owns a bungalow situated in Multan which was given on rent to Abbas under a rental
agreement of five years which expired on 31 March 20X3. Details of payments received as per
the rent agreement are given below.

Rent Rs. 175,000 per month

Security guards’ salaries Rs. 50,000 per month
Non-adjustable security deposit Rs. 2,500,000
On expiry of the rental agreement, Farheen refunded the security deposit to Abbas and rented
out the bungalow to a new tenant Zafar on the same terms and conditions.

Farheen pays Rs. 40,000 per month to a security services company which provides security
guards at the bungalow.

(ii) She owns a residential plot in Karachi. On 1 March 20X3, she decided to sell the plot to Mehreen
for Rs. 2,200,000 and received a deposit of Rs. 220,000. On 1 June 20X3, she forfeited the
deposit on refusal of Mehreen to purchase the plot.
(iii) On 1 December 20X1, she had acquired a furnished office on monthly rent of Rs. 5,000 for her
own use and had paid a non-refundable amount of Rs. 2,000,000 to the previous tenant for
vacating the office. During the year, she received an offer of Rs. 2,400,000 from Shehroz to
vacate this office which she accepted and received the amount on 1 March 20X3.

(iv) On 1 October 20X2, she inherited a factory with plant and machinery from her father and let it
out on 1 December 20X2 at a monthly rent of Rs. 500,000.

(v) Legal and professional charges of Rs. 40,000 were paid for preparation of rental agreements.

(vi) On 15 November 20X2, she received income tax refund of Rs. 180,000 related to tax year 20X1.
This amount included Rs. 30,000 being additional payment on delayed refund.
Required: Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder,
compute the total income of Farheen under appropriate heads of income for the tax year 20X3.

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Question 5. [CAF 6 Past Paper, Autumn 2020, Q4(b), 8 marks]

Ahmed has completed his MBA from a university in USA. He had been living there since August 20X1 for
his education and came to Pakistan only once in 20X5 i.e. from 10 March 20X5 to 30 September 20X5
and then went back to USA to complete his MBA. Along with his studies, he was also doing a part time
job at a restaurant in USA till November 20X7. He returned to Pakistan on 1 December 20X7 and
commenced a trading business from 1 January 20X8.

Below is the computation for taxable income/loss for the tax year 20X8:

Note A: Selling and administrative expenses include the following:

(i) Salaries of Rs. 840,000 paid to two employees equally in cash. Withholding income tax was
deducted as required under Income Tax Ordinance, 2001.

(ii) Rs. 600,000 in respect of the feasibility study which was conducted before commencement
of the business.

Note B: Donation of Rs. 600,000 was paid to a charitable hospital in Pakistan and Rs. 250,000 was paid
to a non-profit organization in USA.

Required: Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder,
comment on the above tax computation for tax year 20X8. Give suggestion(s) wherever required.
Note: Revised computation is not required.

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Question 6. [CAF 6 Past Paper, Spring 2020, Q1, 18 marks]

For the purpose of this question, assume that the date today is 31 August 20X8.

Shahid is engaged in the business of manufacturing and supplying of auto parts. Following is the extract
of his profit or loss statement for the tax year 20X8:

Additional information:
(i) The above accounts have been prepared on cash basis and stock-in-trade has been valued on
prime cost method. However, Shahid wants to change the method of accounting from cash basis
to accrual basis. In this respect, following information has been gathered:

(ii) Cost of goods sold includes:

 purchase of packing material of Rs. 440,000 from Nasir Traders. No withholding tax was
deducted at the time of payment.
 freight charges of Rs. 85,000. These were paid in cash for transporting goods from suppliers.

(iii) Operating expenses include:

 salary of Rs. 80,000 per month paid to Shahid’s brother who handles administrative matters
of the business.
 expenditure of Rs. 950,000 incurred on the development of a product which is expected to
generate revenue for five years.
 penalty of Rs. 15,000 for late filing of income tax return.

(iv) Financial charges include profit on debt of Rs. 450,000 earned on fixed deposit account
maintained with a bank. The bank withheld income tax and Zakat amounting to Rs. 45,000 and
Rs. 93,750 respectively.

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(v) Other income includes:

 capital gain of Rs. 45,000 received, net of withholding tax of Rs. 6,750, on sale of 20,000
shares in Metal Limited (ML) in November 20X7. ML is listed on PSX. On 1 January 20X6,
Shahid purchased these shares for Rs. 200,000 at initial public offering.

 rent of Rs. 980,000 received from an agriculture land in Badin. No withholding tax was
deducted at the time of receipt.

(vi) Tax depreciation for the year amounts to Rs. 680,000.

(vii) Tax deducted at source by customers amounts to Rs. 875,000.

(viii) The unabsorbed tax depreciation brought forward from tax year 20X7 amounts to Rs. 568,000.
Required: Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder,
compute total income, taxable income and net tax payable by or refundable to Shahid for the tax year
20X8. (Use accrual basis of accounting)
 Your computation should commence with profit before tax figure.
 Ignore minimum tax under section 113.
 Show all relevant exemptions, exclusions and disallowances.

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Question 7. [CAF 6 Past Paper, Autumn 2018, Q1, 17 marks]

Saeed, a citizen of Pakistan, was in Delta Shipping Company (DSL) based in Spain for the past three
years. His monthly salary was USD 15,000. The amount received during the tax year 20X9 was converted
to Pak Rupees at an average exchange rate of USD 1 = PKR 131.

On 1 October 20X8, he resigned from DSL and joined Haris Pharma Limited (HPL) in Pakistan as a
General Manager. He was offered following monthly salary and allowance in HPL:

Rupees
Basic salary 600,000
Medical allowance 66,000

In addition to the above, he was also provided the following:

(i) Bonus equal to two monthly basic salaries. However, bonus amount was adjusted in proportion
to the duration of his stay in the company. The bonus amount was paid to him on 5 July 20X9.
(ii) Two company-maintained cars. Both cars were purchased on 1 October 20X8. The car costing
Rs. 3,500,000 was used for official purposes whereas the car costing Rs. 1,900,000 was used for
personal purposes.
(iii) Free lunch from the restaurant owned by one of HPL’s directors. The fair market value of food
provided to him during the year was Rs. 125,000.

(iv) A special allowance of Rs. 20,000 per month to meet expenses wholly and necessarily incurred
in the performance of his official duties. Actual expenses incurred by him during the year were
Rs. 150,000.
(v) Provident fund contribution of Rs. 60,000 per month. An equal amount per month was also
contributed by Saeed to the fund.
Other information relevant to tax year 20X9 is as under:

(i) On 1 December 20X8, Saeed obtained a loan of Rs. 25 million from a scheduled bank at 15%
mark-up per annum to acquire a residential house.

(ii) During the year, he received dividends of Rs. 575,000 from a listed company. The amount was
net of withholding income tax at the rate of 15% and Zakat of Rs. 62,500 deducted under the
Zakat and Usher Ordinance, 1980.

(iii) Withholding tax deducted by HPL from Saeed’s salary during the tax year 20X9 amounted to Rs.
1,300,000.
Required: Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder,
compute under the appropriate head of income, the total income, taxable income and net tax payable
by or refundable to Saeed for the tax year 20X9.

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Question 8. [CAF 6 Past Paper, Spring 2018, Q1, 18 marks]

Mr. Qateel, a resident individual, is engaged in the manufacture of various consumer goods under the
name and style ‘Qateel Enterprises (QE)’. The following information has been extracted from the records
of QE for the financial year ended 30 June 20X8.
Rupees
Total turnover 28,500,000

Cost of sales (26,155,000)

Gross profit 2,345,000

Operating expenses (4,500,000)

Operating loss (2,155,000)

Finance charges on lease of machinery (35,703)

Other income 5,000,000

Profit before tax 2,809,297

Additional information:

(i) Cost of sales includes:

a. Rs. 45,000 paid as fine for violation of contract with a customer for delay in supply of goods.
b. accounting depreciation of Rs. 1,900,000 (including depreciation on leased assets).
(ii) Operating expenses include:
a. Rs. 450,000 paid for renewal of a manufacturing licence for fifteen years.
b. vehicle tax paid in cash amounting to Rs. 55,000 for eight office cars.
c. Rs. 200,000 paid as security deposit to K-Electric (KE) for replacement of transformer at the
factory.
d. Rs. 300,000 collected by KE as advance tax through monthly electricity bills.
e. cash donation to poor families amounting to Rs. 64,600 and donation of Rs. 2,000,000 paid
through cheque to Edhi Foundation, which is listed in Part 1 of the Second Schedule of the
Income Tax Ordinance, 2001.
f. penalty of Rs. 25,000 imposed by the Commissioner Inland Revenue for late filing of annual
return of income for the tax year 20X7.
g. entertainment expenditure of Rs. 128,000 incurred on arrival of foreign customers for
business purposes.

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(iii) Other income includes:

a. dividend of Rs. 580,000 received from listed companies. The amount is net of income tax at
the rate of 15% and Zakat of Rs. 100,000 deducted under the Zakat and Usher Ordinance,
1980.
b. Capital gain of Rs. 1,200,000 from sale of shares of a private limited company. Shares were
acquired on 1 August 20X3.
(iv) On 30 June 20X8, leased machinery was transferred to Qateel on maturity of lease. The leasing
company was asked to adjust the amount of security deposit against the residual value of Rs.
100,000. The date of commencement of lease was 1 July 20X3.
Lease rentals paid during the year amounted to Rs. 270,000.
On the date of maturity, the accounting written down value and market value of the machinery
was Rs. 590,490 and Rs. 800,000 respectively.
(v) During the year, a warehouse was constructed for storage of goods at a cost of Rs. 1,040,000.
No accounting depreciation has been recorded on it.
(vi) Tax depreciation for the tax year 20X8 without considering the effect of para (iv) and (v) above,
amounted to Rs. 1,560,000.
(vii) Advance income tax paid during the year amounted to Rs. 480,000.
Required: Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder,
compute the total income, taxable income and net tax payable by or refundable to QE for the year
ended 30 June 20X8.
Note:
 Ignore minimum tax under section 113.
 Show all the relevant exemptions, exclusions and disallowances.

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